The Fed Is as Clueless as You Are

Bond traders love certainty. Too bad it's in such short supply.
At Closing, February 22rd
114.98 USD

Bond traders are looking for certainty in an uncertain world, so it's comforting for them to think the Federal Reserve has some secret trove of economic data or corner on wisdom that it uses to make Important Decisions, like the timing of interest rate increases. 

But it turns out the policy makers are just as in the dark as everyone else.

Fed officials were itching to kick up benchmark borrowing costs a fraction of a percentage point sooner rather than later. Members not-so-quietly set the table for an increase in June, and the Fed chair herself, Janet Yellen, did little to pump the brakes in a speech before Memorial Day weekend. Traders listened eagerly and responded accordingly.

Round Trip

Traders priced in a greater chance of a June interest-rate increase in response to remarks by Federal reserve officials

Source: Bloomberg

Then came Friday. The U.S. Labor Department released a greatly disappointing jobs report, which showed that employers added the fewest workers in May in almost six years. Sometimes bad employment data can be rationalized by being dominated by one idiosyncratic event or sector, but not this one.

“The slowdown in job growth looks pretty pervasive across industries,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a Bloomberg News article. “It raises some questions about the momentum of growth and about the outlook."

The market's response was fierce. Yields on two-year Treasuries plunged.

Off a Cliff

Traders flooded back to short-term Treasuries, pushing down yields after bad jobs data

Source: Bloomberg

Intraday times are displayed in ET.

The dollar weakened against its peers.

Losing Strength

The dollar weakened against its peer currencies after the disappointing jobs report

Source: Bloomberg

Intraday times are displayed in ET.

And the probability of that June rate increase fell to just 4 percent from 22 percent the day before, according to futures contracts tracked by Bloomberg. Even the possibility of a July increase fell to about 29 percent from 55 percent on Thursday.

"This was quite shocking -- it’s way under expectations," said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union. The Fed “will postpone a nearby rate hike for sure -- maybe they’ll be forced to look beyond the summer."

Some analysts noted that the Fed has lost credibility. But perhaps traders have just had too much faith in the omniscience of central bankers all along. They don't have a crystal ball and are apparently as vulnerable as anyone else to misreading economic tea leaves. There is no corner on certainty in an uncertain world.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lisa Abramowicz in New York at

    To contact the editor responsible for this story:
    Daniel Niemi at

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